Shanghai Friendship to Acquire Rival Bailian in $2.4 Billion Shares Swap

Shanghai Friendship Group Inc. agreed to buy rival department store chain Shanghai Bailian Group Co. for about 16 billion yuan ($2.4 billion) in a stock swap, as the city government pushes state-owned companies to merge.

Friendship, which owns 34 percent of Hong Kong-listed Lianhua Supermarket Holdings Ltd., will offer 0.86 share for each one in Shanghai Bailian, the companies said in statements to the Shanghai stock exchange today. Friendship also plans to pay another 4.7 billion yuan worth of shares to buy a stake in closely held Nextage Department Store and boost its Lianhua holding to 55 percent.

“The transaction will boost earnings at Shanghai Friendship, which will probably become the key retailer in the Shanghai area, the key market in the country,” Yao Wenqi, a Shenzhen-based analyst at Great Wall Securities Co., said in a phone interview today.

Shanghai’s government is merging companies to improve competitiveness. Shanghai Pharmaceuticals Holding Co. completed a merger of two local drugmakers through a share swap in September. Shanghai Airlines Co. was delisted from the exchange in January after it was acquired by larger city rival China Eastern Airlines Corp.

Friendship’s shares rose by the 10 percent daily limit to 18.57 yuan on the Shanghai Stock Exchange, the biggest advance since January 15, 2007. Bailian rose 9.1 percent to 15.05 yuan, the biggest gain since Dec. 1, 2008. The shares of both companies resumed trading today after a July 19 suspension.

Lianhua was suspended today in Hong Kong trading.

Pretax Profit

The value of the deal was derived using a stock price of 16.88 yuan, the level at which Friendship closed on July 16, before it was suspended.

Friendship’s pretax profit may more than double to 1.98 billion yuan this year and 2.02 billion yuan next year after the acquisition, according to a separate e-mailed statement from Bailian today. Sales may reach 43.7 billion yuan and 46.6 billion yuan in the two years.

Friendship will buy from Bailian’s parent an investment company that holds 21 percent of Lianhua, the statements said.

Bailian’s parent will increase its holding in Friendship to 49.26 percent after the swap from 27.3 percent, the statements said. The stake may increase to 57.71 percent if shareholders take cash, the said.

--Jiang Jianguo, Jing Jin. Editor: Gregory Turk, Frank Longid

To contact the editor responsible for this story: Bloomberg News at jliu42@bloomberg.net

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